Crisis Looms in Mortgages - Mercedes-Benz Forum

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post #1 of 4 (permalink) Old 03-11-2007, 03:45 AM Thread Starter
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Crisis Looms in Mortgages

On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.
What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21.
The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.
Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.
Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.
Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market.
“The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” said Josh Rosner, a managing director at Graham-Fisher & Company, an independent investment research firm in New York, and an expert on mortgage securities. “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”

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Crisis Looms in Mortgages - New York Times
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post #2 of 4 (permalink) Old 03-11-2007, 12:26 PM
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If a Real Estate Analyst at Bear Stearns made that call March 1, he/she needs to go work at McDonalds as a Fry Cook. The Real Estate market has been sending signal flares up for the past year.

The CEO of the largest builder in the Country, Horton, decided to ignore the usual charts and BS that goes with a forward looking statement for his projections for 2007 and just laided it out on the line. "I don't want to be too sophisticated here, but '07 is going to suck, all 12 months of the calendar year," Tomnitz said.

Entire article here. CEO of largest home builder sees trouble through 2007 -

or just read it here:

NEW YORK — The chief executive of the nation's largest home builder by volume said Wednesday that 2007 would "suck" for his company, providing the clearest signal yet that a recovery in the battered sector is farther off than many thought.
Speaking at an investor conference in New York, D.R. Horton (DHI) CEO Donald J. Tomnitz said he expects to get more pricing power in 2008 but not before home prices continue their decline this year as builders try to sell the glut of houses currently on the market.

"I don't want to be too sophisticated here, but '07 is going to suck, all 12 months of the calendar year," Tomnitz said.

He said excess inventory, built up during a five-year boom that saw land purchases and housing construction reach all-time highs, is the biggest problem facing the sector.

After months of declining prices and home sales, there were signs late last year that the market had reached bottom, prompting many to predict a recovery by midyear. But builders have had to keep curbing construction and offering discounts.

Tomnitz said Horton is currently building 26,000 houses, down 35% from its peak of 40,000, but further cuts are coming.

It is going to be "tough" for Horton to reach its internal goal of 50,000 closings in 2007, based on current construction figures, Tomnitz said. That would put 2007 closings below the year-ago level.

The executive said Horton, based in Fort Worth, has taken all the charges it could legally take to write down the value of undeveloped land and to forfeit options to buy land, but he did not rule out further hits to the balance sheet.

"We may have more impairments coming. We'll know that on a quarter-to-quarter basis," he said.

The charges are an admission that the company will not be able to develop properties for a profit, but they also free up cash for other purposes.

"The future is not as bright as we would like it to be, but we feel we're in a strong position going forward," Tomnitz said.

This isn't the first time Tomnitz has offered gloomy predictions for 2007. In January, Horton announced earnings had fallen 64% in the last three months of 2006. At the time, Tomnitz said the slowdown had begun in early 2006 and the market would bottom out this summer.

"We don't see anything on the horizon that would change that opinion," he said then.

Horton's net income for the quarter ended Dec. 31 plummeted to $109.7 million, or 35 cents a share, from $310.1 million, or 98 cents a share, a year earlier.


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post #3 of 4 (permalink) Old 03-11-2007, 12:36 PM
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One of the key triggers to the Shanghai Stock Exchange's drop at the first of the month was a large amount of speculative stocks in the Real Estate Mortgage Holding industry that failed. In other words, many Chinese investors who have invested in US Mortgage companies are starting to lose BIG money as FORECLOSURES continue to stay in record territory. What this will mean for the US Economy is that there will be a tightening of credit and a refusal of credit for “marginal” customers which can perpetuate the slow RE market. That will have an effect on Consumer Goods 1-2 Quarters down the road.

Someone asked a while back what are the Chinese going to do, call in their debt? We are seeing the first round of that NOW. Someone will have to buy it, at a discount which will require more foreclosures to address the bad paper which will write off more which will lessen the tax revenue…


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post #4 of 4 (permalink) Old 03-11-2007, 12:44 PM
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HSBC bad debts hit $10.6 billion

By Steve Slater and Clara Ferreira Marques Mon Mar 5, 8:31 AM ET

LONDON (Reuters) - HSBC Holdings (HSBA.L) on Monday said its 2006 profits rose 5 percent, just short of analysts' expectations, as Europe's biggest bank took a $10.6 billion hit for bad debts after problems in its U.S. mortgage lending.

HSBC (0005.HK) reported a record 2006 pretax profit of $22.1 billion, up from $21 billion in 2005, but below an average forecast of $22.4 billion in a poll of analysts by Reuters Estimates.

Headquartered in London with about 125 million customers worldwide, HSBC said there had been no further deterioration at its troubled U.S. mortgage lending since it warned about the deepening problem a month ago, and it was confident the problems would not spread to other areas.
By midday HSBC shares were up 0.3 percent at 889 pence, valuing the bank at 103 billion pounds ($200.9 billion), against a 1.65 percent drop in the FTSE (^FTSE - news) index.
The bank reported strong growth in Asia, Mexico and its emerging markets, and in its private banking and investment banking arms, HSBC had already warned but what it called a "major setback" in U.S. mortgage lending cast a shadow across the group.on February 7 that problems had deepened in its lending to higher risk U.S. home borrowers, prompting it to oust the head of its North America operations and restructure the business.
"It has not deteriorated (since then)," Douglas Flint, finance director, told reporters on a conference call.
He said the level of bad debts this year will be sensitive to economic conditions, the housing market, interest rates levels and the availability of refinancing options for sub-prime borrowers.
A downturn in the U.S. housing market has hit many lenders in recent months and HSBC said it was acting conservatively to include provisions for mortgages it expects to lose money on in the future.
Mortgages are frequently bought and sold in the U.S. mortgage market, and in recent years HSBC became a big buyer of sub-prime loans originated by other lenders.
It focused on buying second-lien loans, also known as "piggyback loans," which borrowers, who are unable to afford a 20 percent down payment, assume in addition to the primary mortgage.
Flint said its U.S. Mortgage Services arm had stopped lending higher risk products and no longer offered second-liens.
Michael Geoghegan, chief executive, also dismissed criticism that HSBC's acquisition of Household International for $14.8 billion in 2003 had exposed the bank to too much risky lending. The business has been renamed HSBC Finance.
"This is not trailer park lending. The average household income of a typical HSBC Finance customer is $83,000. The typical profile is a 41-year-old with two children and a home worth $190,000 -- the customer base is in line with the demographics of the USA," he told analysts at a presentation.
"This is Main Street America."
Mark Durling, banking analyst at Brewin Dolphin, said last month's warning cushioned the impact and HSBC is seen as conservative in terms of impairments.
"There is some more (bad debt) pain to come, but not as bad as what the market has factored into the share price," he said.

North American bad debt soared to $6.8 billion in 2006 from $4.9 billion, representing 64 percent of the group's total, even though the region only accounts for 21 percent of profits.
Bad debts in Europe, which are mostly in the UK, rose 12 percent on the year to $2.2 billion. Underlying bad debts in the UK were up 8 percent from 2005, in line with its lending growth, and bad debts in the UK retail bank were near flat on the year.
Flint said UK impairments from higher bankruptcies and individual voluntary arrangements were offset by its tighter lending on unsecured loans in the last two years.
HSBC's investment bank arm, CIBM, posted a 12 percent rise in profits to $5.8 billion, aided by buoyant capital markets, although the unit's profit growth slowed from 37 percent in the first half.
"In the third quarter there was a significant slowdown in flow from client revenues," Flint said. "The fourth quarter bounced back, so we had three good quarters and one weak quarter."
HSBC said its income rose 14 percent to $70.1 billion, matched by a 14 percent rise in cost growth.
Its costs as a ratio of income nudged to 51.3 percent from 51.2 percent in 2005.
It raised its full-year dividend by 11 percent to 81 cents per share, just above analysts' expectations.
It said Asia, Middle East, Latin America and other emerging markets were contributing faster growth to the group and it would concentrate future investment mainly in those markets. In mature markets it will enforce tight cost control and dispose of businesses that dilute its return on capital or do not fit strategy, it said.

Last edited by deathrattle; 03-11-2007 at 12:46 PM.
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